The risks we highlighted last month in “Stay Allocated My Friend” have not changed, however there has been a major movement to negative sentiment. There are few additional risks, which we addressed in our August Portfolio meeting. The main one is a further destabilizing trade environment, which hits emerging markets and emerging technology equities hardest first. Accordingly, we reduced exposure in both areas. Once the US/China trade rhetoric subsides, we will look for opportunities to increase exposure in late cycle assets, which include Emerging Market and Technology. However, what if we reached the point where our data, particularly related to credit, leverage and GDP begins to deteriorate? Let’s look at the last big market sell-off, 2015-16, where Emerging Markets fell 46% in the early months of that time period and even the S&P 500 fell 18%. The key takeaway is that our Global Tactical strategies will adapt to changes and seek to preserve capital in risk downturns.

2015 Reversal in Global Stock Market Rally—Tactical Allocation in Action

Global stocks reached an all-time high on May 21, 2015. But tightening credit conditions, weak earnings, and poor global economic growth suggested the rally might not last. We therefore sought to protect the portfolio:

• Reduced Equity allocation by 22% and shifted to defensive sectors
• Increased Fixed Income allocation by 19% and increased duration
• Increased Cash position to as high as 11%

Global stocks declined by 18% in the 8 months following the high in May 2015. During that time period GTA’s beta vs. MSCI ACWI was reduced from 0.71 to 0.41. This enabled the portfolio to achieve an upside/downside capture of 105/76 against its benchmark, and 74/59 against MSCI ACWI from June 2015 through January 2016. We aren’t making the recession case yet, but that does not mean we will not continue to identify significant pockets of risk to avoid. For example, this year, we’ve evaded troubled Latin American and Oil sector exposure; Mexican equities are down 23% YTD and the oil ETF is down 19%. As Portfolio Managers, we field many “What If,” questions with stock market downturns; the above 2015 example demonstrates how we handled a recent and very significant “market sell-off.” It is important to note that we do this in all of our Global Tactical portfolios so that Financial Advisors don’t have to adjust their allocations and clients can sleep at night. We feel What Not to Do is easy—don’t panic… instead, remember that we are dedicated to risk adjusted returns and capital preservation.

While our long-term view remains intact, we expect further volatility in the days and weeks to come. With this in mind and in anticipation of a choppy August, this month we de-risked a little and took some equities off the table in areas we believe will be at the center of trade war escalation.

Recent Portfolio Changes

We trimmed our position in emerging market equities and added to US dollar emerging market bonds. Global demand has not yet bottomed, and residual trade war fears do not favor equity exposure. Given solid sovereign fundamentals and cyclical highs for yield spreads, we prefer emerging market US dollar bonds.

We exited our position in Technology and added to Ultrashort Duration Bonds. It’s imperative to raise “near cash” positions to help protect our portfolio from episodic volatility, and we feel the technology sector is vulnerable to current risks.

Portfolio Changes May 1, 2019¹

Fixed Income (US)

We continue to be overweight in our position to Ultrashort Maturity Bond. Huge moves in interest rates have left government bonds at extremely overbought levels, reflecting a very bearish view of economic growth. We continue to see duration as a risk and favor ultrashort duration at the expense of allocations to long-dated fixed income.

We maintain our position in Preferred Stocks. We remain convicted in our position. The asset class provides attractive yield and portfolio diversification.

Fixed Income (International)

We increased our position in Emerging Market Bonds. We increased exposure to emerging market bonds — its attractive yield and positive tailwinds will continue to provide diversification benefits to the portfolio.

Equity (US)

We maintain positions in Quality and Momentum Factor equities. We continued to consolidate exposure in our US equity book to focus on late-cycle factors and secular themes. Quality equities possess pricing power, exhibit strong profitability, and have additional sustainable competitive advantages which allow businesses to remain viable over time. We feel this holding is prudent in the later stages of the US credit cycle. Over the shorter term, Momentum equities should outperform as economic growth reaccelerates in the second half of 2019 and trends persist.

Equity (International)

We maintain a reduced position in Emerging Market equities. The most important risk to emerging markets (a big Chinese growth slowdown or collapse in its currency) is unlikely but has increased on the margin. We have reduced emerging market equity exposure. We are still watching the effects the trade war with China could have on Asia.

Alternatives

We maintain a position in Energy MLPs. We are concentrating our alternative exposure around our convicted view in Energy MLPs. The asset class has an attractive yield and has held up well amid the most recent selloff in the barrel of oil. From here, spot oil prices are biased towards the upside, and global spare capacity is too thin to absorb/respond to a loss of all output from Venezuela and Iran simultaneously.

We maintain a position in Gold. We added the precious metal as a hedge against volatility. When risk assets are trading lower, gold holds value relative to other asset classes.

¹ Information as of 8/5/2019. Individual account allocations may differ slightly from model allocations.
² Some Emerging Markets allocation overlaps with regional allocations.
³ Excludes GTA’s alternative, cash, and cash equivalent positions.
⁴ Contains international exposure
⁵ Gross of Fees

Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.

The investment descriptions and other information contained in this Markets in Motion are based on data calculated by W.E. Donoghue & Co., LLC (W.E. Donoghue) and other sources including Morningstar Direct. This summary does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. This report should be read in conjunction with W.E. Donoghue’s Form ADV Part 2A and Client Service Agreement, all of which should be requested and carefully reviewed prior to investing.

The Global Tactical Allocation Composite (“Composite”) was created on July 1, 2009. The Global Tactical Conservative Composite (“Composite”) was created on February 1, 2014. The Global Tactical Income Composite (“Composite”) was created on February 1, 2014. The Global Tactical Growth Composite (“Composite”) was created on February 1, 2015. W.E. Donoghue acquired 100% of the assets of JFG on December 29, 2017.

Composite returns are calculated gross of investment management fees, net of investment trading expenses and underlying fund costs but do not reflect the effect of income taxes on the investment returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. Performance reflects the reinvestment of dividends, income, and capital appreciation. Composite returns are calculated monthly, which are described in greater detail in the firm’s Form ADV Part 2A, using the time-weighted total rate of return methodology. Monthly returns are geometrically linked to calculate quarterly and annual returns. As fees are deducted quarterly, the compounding effect will be to increase or decrease their impact by an amount directly related to gross portfolio performance, and dependent on direction, magnitude, and order of returns. For example, on a portfolio with a 2% annual fee, if gross performance is 10%, and performance is equally distributed across all four quarters, the compounding effect of the fees will result in a net annual performance of 7.81%. No leverage, derivatives, or shorts are used. Past performance is not indicative of future results.

There can be no assurance that the purchase of the securities in this portfolio will be profitable, either individually or in the aggregate, or that such purchases will be more profitable than alternative investments. Investment in any Global Tactical Portfolio, or any other investment or investment strategy involves risk, including the loss of principal; and there is no guarantee that investment in W.E. Donoghue’s Portfolios or any other investment strategy will be profitable for a client’s or prospective client’s portfolio. Investments in W.E. Donoghue’s Portfolios, or any other investment or investment strategy, are not deposits of a bank, savings, and loan or credit union; are not issued by, guaranteed by, or obligations of a bank, savings, and loan, or credit union; and are not insured or guaranteed by the FDIC, SIPC, NCUSIF or any other agency. The composite strategy provides diversified exposure to various asset classes such as equities, fixed income, and alternatives utilizing liquid exchange-traded products. Diversification does not guarantee a profit or protect against a loss.

The Blended Benchmark Moderate is a benchmark comprised of 50% MSCI ACWI, 40% Bloomberg Barclays Global Aggregate, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Barclays Global Aggregate measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

The Blended Benchmark Conservative is a benchmark comprised of 35% MSCI ACWI, 55% Bloomberg Barclays Global Aggregate, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Barclays Global Aggregate measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

The Blended Benchmark Growth is a benchmark comprised of 65% MSCI ACWI, 25% Bloomberg Barclays Global Aggregate, & 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Barclays Global Aggregate measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

The Blended Benchmark Income is a benchmark comprised of 80% Barclay’s Global Aggregate Bond Index, 10% MSCI ACWI, & 10% S&P GSCI rebalanced monthly. The Barclays Global Aggregate measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities. The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

The blended benchmark returns are calculated on a fully collateralized basis with full reinvestment. The returns do not include fees or expenses that are associated with managed accounts.

You cannot invest directly in an index. A more detailed description of the benchmark’s constituents is available upon request. The information contained in this presentation related to JAForlines represents the strategies and performance achieved prior to the acquisition.

W.E. Donoghue & Co., LLC is a registered investment advisor with the United States Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940.